Cryptocurrencies suffered significant losses on Friday, with Bitcoin back above $30,000, but it is still on track to post a record streak of losses after the collapse of TerraUSD, the so-called stablecoin, that has proliferated in the cryptocurrency markets.
Crypto assets were also swept up in a massive sell-off of risky investments due to fears of rising inflation and higher interest rates. Sentiment is particularly fragile as currencies that are supposed to be pegged to the dollar have faltered.
Bitcoin, the largest cryptocurrency by total market capitalization, managed to bounce back in the Asian session and was trading around $30,500 at 11:40 GMT. It made some kind of recovery from a 16-month low of around $25,400 it reached on Thursday.
But it’s still well below last week’s levels of around $40K, and unless there is a recovery in weekend trading, it is heading for a record seventh consecutive weekly loss.
“I don’t think the worst is over,” said Scotty Siu, chief investment officer at Axion Global Asset Management, a Hong Kong-based company that runs a crypto-index fund.
“I think there are more downsides in the coming days. I think what we need to see is the collapse of open interest much more, so the speculators are really out of it, and that is when I think the market will stabilize.”
Cryptocurrency-related stocks have been bombarded, with shares at the broker Coinbase COIN.O flat overnight but still down by half in just over a week.
In Asia, Hong Kong-listed Huobi Technology 1611.HK and Hong Kong-listed BC Technology Group 0863.HK, which operates trading platforms and other crypto services, saw a weekly decline of more than 20 percent.
But the broader financial markets have so far seen little to no detrimental impact from the cryptocurrency crash.
“Cryptocurrencies are still small, and their integration into the broader financial markets is still very small,” said James Malcolm, head of forex strategy at UBS.
“The idea that what happens in cryptography stays in cryptography – and that’s in many ways where we’re still right now.”
The sell-off has nearly halved the global market cap of cryptocurrencies since November, but the pullback has turned into panic in recent sessions as the stablecoins weighed.
Stablecoins are tokens tied to the value of traditional assets, often US dollars, and are the primary means of moving funds between cryptocurrencies or for converting balances into fiat money.
Cryptocurrency markets have been shaken this week by the crash of TerraUSD (UST), which broke its peg to the dollar in a 1:1 ratio.
The coin’s complex stabilization mechanism, which involved balancing with a free cryptocurrency called Luna, stopped working when Luna came under selling pressure. TerraUSD last traded around 9 cents, while Luna is down near zero.
Tether, the largest stablecoin that developers say is backed by dollar assets, also came under pressure and fell to 95 cents on Thursday, according to CoinMarketCap data, but returned to $1 on Friday.
“More than half of all bitcoin and ether traded on exchanges are against stablecoin, with USDT or Tether taking the largest share,” analysts at Morgan Stanley said in a research note.
“For these types of stablecoins, the market needs to trust that the issuer has enough liquid assets that they can sell in times of market stress.”
Operator Tether says it has the necessary assets in Treasuries, cash, corporate bonds and other money market products.
But Tether is likely to face further tests if traders continue to sell, and analysts fear the tension could spill over into financial markets if pressure forces more and more liquidations.
Rating agency Fitch said in a note Thursday that there could be “significant negative repercussions” for cryptocurrencies and digital finance if investors lose faith in stablecoins.
“Many regulated financial entities have increased their exposure to cryptocurrency, cryptocurrency, and other forms of digital financing in recent months, and some Fitch-rated issuers could be affected if crypto market volatility becomes severe,” she said.
However, Fitch said that weak links between crypto markets and regulated financial markets will limit the potential for volatility in the cryptocurrency market to cause broader financial instability.